Thank you for inviting me to give evidence to
your Committee on 14 December. I enjoyed the discussion and I
hope that you and your Committee members found our evidence helpful.

I promised the Committee a note on the sanctions
procedure, to explain how this works currently, and the likely
size of sanctions under the Commission legislative proposals.
As I explained to the Committee, the essential elements of the
Commission's proposals and the Taskforce conclusions have been
firstly, to extend sanctions to the preventative arm of the Stability
and Growth Pact (currently, they only exist in the corrective
arm) and secondly, to improve the speed and automaticity with
which these sanctions are applied to Member States.

There is already provision for sanctions in
Articles 11 and 12 of Regulation 1467/97 on the Excessive Deficit
Procedure. The first step of sanctions is, "as a rule"
to require a non-interest-bearing deposit of the Member State,
which may be supplemented by other fines. The non-interest-bearing
deposit consists of a fixed amount (0.2 per cent of the Member
State's GDP) plus a variable component (10 per cent of the difference
between the Member State's deficit as a percentage of GDP in the
preceding year and the Treaty reference value for deficit of 3
per cent of GDP). Each year thereafter, the Council may decide
to require additional deposits from the Member State, again fixed
at 10 per cent of the difference between the Member State's actual
deficit and the Treaty reference value. The Regulation states
that any single deposit must not exceed 0.5 per cent of the Member
State's GDP. There is also a general rule in the Regulation whereby
the non-interest-bearing deposit is converted into a fine two
years after the deposit was levied, if the Member State has not
taken sufficient action to address its excessive deficit in that
time.

The Commission proposals aim to improve this
system in a number of ways. Assuming that the Commission proposals
are adopted without changes, in the preventative arm (COM 2010
524), if the Commission reports that a Member State's fiscal policies
are acting against the Broad Economic Policy Guidelines, it proposes
that an interest bearing deposit of 0.2 per cent of the Member
State's gross GDP in the previous year should be levied. Council
would then have a maximum of 10 days to decide whether or not
to apply this depositit would take a qualified majority
of Member States to reject the Commission's proposal (this is
known as "reverse qualified majority voting" in EU terms).
If the Member State takes the appropriate policy action, it will
receive its money back plus any interest (which is calculated
on the basis of the Commission's credit risk and prevailing market
conditions). If not, and the Member State enters the Excessive
Deficit Procedure (EDP), the deposit is converted into a non-interest
bearing deposit, ie, the Member State cannot receive any interest.

In the corrective arm of the Stability and Growth
Pact, under the Commission proposals (COM 2010 522), once a Member
State enters EDP, it is required to make a non-interest-bearing
deposit to the EU of 0.2 per cent of gross GDP plus the 10 per
cent variable component. If the Member State has already paid
an interest-bearing deposit under the preventative arm, this will
be converted into a non-interest-bearing deposit, so the Member
State will only need to pay the 10 per cent variable component.
As per current practice, the total deposit cannot exceed 0.5 per
cent of the Member State's GDP. The proposals also make it clear
that the variable component may be calculated on the basis of
the debt criterion if the breach of the Stability and Growth Pact
has been on the basis of high debt, rather than high deficitscurrently,
the 10 per cent difference is only calculated on the basis of
the divergence between the Member State's deficit and the 3 per
cent Treaty reference value.

If the Member State subsequently takes effective
action to correct its deficit, it will receive its deposit back,
but without interest. However, if the Member State has not taken
effective action, the Commission will propose that the deposit
should be converted into a fine. Again, the Council have 10 days
within which they must decide whether to fine the Member State,
and it would take a qualified majority of Member States to reject
the Commission proposal.

A further new proposal by the Commission (COM
2010 525) is for sanctions to euroarea Member States that have
repeatedly breached Council recommendations on addressing macroeconomic
imbalances. There is no system of escalationthese are fines,
which will be levied on an annual basis until the Member State
takes corrective action to address its imbalances. The fines are
set at 0.1 per cent of the Member State's GDP in the preceding
year. Once again, Council would decide the application of these
sanctions by reverse majority voting on a proposal from the Commission.

The Taskforce report proposes a very similar
model of escalating fines to the Commission proposals. However,
there is one major differencethe Taskforce report concluded
that once a Member State is identified as running fiscal policies
that deviate from the principles of prudent fiscal policymaking
as set out in the Broad Economic Policy Guidelines, the Council
should give the Member State recommendations within one month.
After that period, the Member State has five months to take corrective
action. If, after that time, the Member State has not made sufficient
progress, Council decides by reverse majority voting whether to
apply an interest bearing deposit to the Member State.

The Commission and Taskforce proposals represent
a significant improvement on the current system, as they shorten
the time between the different stages for application of sanctions.
As I said at the evidence session, the effectiveness of any sanctions
system will be determined by the degree of political will within
the Council to apply the system fairly. However, although the
reverse majority voting method rightly requires the Council, rather
than the Commission, to make the ultimate decisions on application
or escalation of sanctions, it also makes it considerably more
difficult for a Member State to gather sufficient political support
to escape sanctions.

The Committee asked about the feasibility of
applying sanctions to a Member State that already has a high deficit
and/or high public debt levels. I would draw the Committee's attention
to provisions in the draft Commission proposals that allow for
sanctions to be reduced or cancelled. This may be done "on
grounds of exceptional economic circumstances" or if the
Member State in question makes a successful appeal to the Commission
within 10 days of the Council deciding to impose or escalate the
sanction.

Naturally, these proposals may be amended by
the Council prior to adoption. If there are any significant changes
to the proposed mechanisms for adopting sanctions, I will write
to the Committee to provide an update.

I hope that you find this information useful
in your inquiry, and I wish you and your Committee a very happy
Christmas.